Economic Review
First Quarter 2005 

How Long is a Long-Term Investment? - (PDF 238K)
By Pu Shen

Conventional wisdom tells us that stocks tend to outperform government bonds in the long term. That is, if stocks are held long enough, they are usually better investments because their total return is likely to be higher than the return on bonds. While this view may be correct in principle, in practice a crucial question remains: How long is long enough?

The answer is important to every investor, not just the wealthy few. With employers relying increasingly on defined-contribution retirement plans, employees must make their own saving and investment decisions.

Shen reviews historical patterns to show investors how the riskiness of stocks and bonds can change as an investor’s holding period lengthens. First, she explains why stocks are generally considered riskier than government bonds and thus, on average, should pay higher rates of return to attract investors. She then shows why stocks, with their higher average rates of return, tend to perform better over sufficiently long holding periods. Next, she examines the historical patterns of stock and bond returns in the United States. She shows that sufficiently long has been very long relative to most people’s holding periods. Finally, she examines various holding periods in detail. She finds that, for many investors whose holding periods were not sufficiently long, risks for both stocks and bonds were quite high. She concludes that, historically, longer holding periods may have reduced the riskiness of stock investments but not bond investments. Further, for most individual investors, feasible holding periods have seldom been long enough to take full advantage of long-term stock investments.

Recent Evolution of Large-Value Payment Systems: Balancing Liquidity and Risk - (PDF 197K)
By Antoine Martin

Large-value payment systems have evolved rapidly in the last 20 years, continually striking a balance between providing liquidity and keeping settlement risk under control. Changes to the design or to the risk management policies of such systems were needed, in part, due to the growth in the value of transactions on these systems. For example, in the United States the value of transactions on Fedwire, the Federal Reserve’s large-value payment system, increased from about 50 times GDP in 1989 to over 62 times GDP in 2003. This value exceeded $704 trillion in 2003. This growth raised concerns that the settlement failure of a large institution could pose severe economic consequences.

The disruption in settlements after September 11, 2001, brought new focus to questions such as: How reliable are the payment systems? How should liquidity be provided to system participants? And how can central banks protect themselves from excessive risk?

Martin considers the evolution of large-value payment systems in light of the trade-off between providing liquidity and limiting settlement risk. First, he provides some background on large-value payment systems and discusses the trade-off between providing liquidity and controlling settlement risk. Second, he describes the recent evolution of payment systems and explains how this evolution was spurred by increasing concerns about settlement failure, particularly in the EU, the United States, and Canada. Third, he explains some of the differences between three of the major large-value payment systems. Finally, he describes how technological progress and faster computers are allowing new systems to combine the best features of delayed net settlement and real-time gross settlement systems. These systems could offer a better trade-off between liquidity and risk.

A Resurgent Rural Economy Spurs Farmland Values - (PDF 217K)
By Jason Henderson and Nancy Novack

The rural economy broke free from the reins of recession in 2004 with an especially strong performance in the farm sector. Net farm income easily surpassed the record high of 2003. And the weakness that plagued the nonfarm rural economy in recent years appears to have been replaced with stronger job growth and higher incomes.

Strong performances in the farm and nonfarm sectors have led to soaring land values. Rising incomes are often capitalized into asset values, and the past year was no exception. Rising rural incomes quickly led to strong land value gains. Since real estate is rural America’s most important asset, strong land values are often viewed as an indicator of a healthy rural economy.

Looking ahead to 2005, healthy rural incomes in agriculture and on Main Street will continue to underpin farmland value gains. While farm incomes are expected to remain strong, the industry must keep a close watch on trade developments and an emerging disease threat to the soybean crop. The nonfarm economy is expected to strengthen with the rest of the nation. Growth in jobs and wages in high-skilled industries is a welcome sign for rural America in its quest to build new economic engines in high-skilled activities.

Henderson and Novack review the performance of the rural economy in 2004 and look ahead to the prospects for 2005. First, they focus on the booming farm economy in the past year. Second, they discuss the recovery in the nonfarm rural economy. Third, they examine the influence of stronger farm and nonfarm incomes on farmland values. Finally, they look at the issues facing the rural economy in the coming year.

Back to top          Economic Review home